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Oct. 21 — The IRS has pulled in more than $9.9 billion in taxes and penalties since 2009 from
a voluntary compliance program that taxpayers can enter to avoid criminal prosecution
for not reporting offshore accounts.

Updated data show 55,800 taxpayers have come into the Offshore Voluntary Disclosure
Program to resolve their tax obligations, the Internal Revenue Service said in an
Oct. 21 news release (IR-2016-137). The OVDP is designed for taxpayers with exposure to potential criminal liability
or substantial civil penalties due to a willful failure to report foreign financial
assets and pay all taxes on those assets.

Another 48,000 taxpayers have made use of separate procedures to correct prior non-willful
omissions and meet their federal tax obligations, paying about $450 million in taxes,
interest and penalties, the agency said.

As the IRS moves forward with its compliance efforts, tax professionals said they
expect the type of taxpayers coming forward to evolve due to the changing international
financial environment and technological advances that improve information-sharing
between countries.

“The IRS has passed several major milestones in our offshore efforts, collecting a
combined $10 billion with 100,000 taxpayers coming back into compliance,” IRS Commissioner
John Koskinen said in the news release. “As we continue to receive more information
on foreign accounts, people’s ability to avoid detection becomes harder and harder.”
The IRS urges taxpayers with international tax issues to come forward, he said.

New Wave

Some of the success of the agency’s compliance efforts stems from the Department of
Justice’s Swiss Bank Program, which put pressure on the banks to turn over information
on their U.S. clients. In exchange they paid penalties but avoided prosecution.

In Switzerland, the IRS and the DOJ were able to “smoke” out most of the criminals
in the Swiss banking system, said Scott D. Michel, a member of Caplin & Drysdale Chartered,
adding that the agency’s offshore compliance efforts have been among the most successful.

While the Swiss program uncovered a lot of “low-hanging fruit,” Michel said he expects
the voluntary compliance cases that the IRS sees over the next decade will be different
than the cases of the past eight years.

One factor pushing taxpayers to come forward is the Foreign Account Tax Compliance
Act (FATCA), which requires foreign financial Institutions to report the foreign assets
held by their U.S. account holders or be subject to withholding.

“It is the bank pressure on these individuals that I think is starting to drive a
smaller, but newer wave of people coming forward, particularly in areas that have
not seen a lot of attention like Latin America, the Middle East and Asia,” said Michel,
who advises U.S. citizens living abroad and foreign entities doing business in the
U.S. about tax compliance.

Complex Cases, More Enforcement

Taxpayers may choose to enter into the IRS’s voluntary compliance program because
they are dealing with a nuanced set of factors that may expose them to U.S. tax obligations
that they weren’t originally aware of, Michel said.

A lot of these people have shares in a U.S. company or are beneficiaries of a U.S.
trust that their predominantly non-U.S. family has put them in, he said. “Not everyone
is as attentive to their compliance obligations when they’re not living in the U.S.,
confronting tax filing deadlines every year or dealing with tax professionals,” he
said.

Enforcement pressure resulting from a decision by the IRS or the DOJ to pursue another
program targeting a specific region or country, could also create an influx of taxpayers
into the IRS’s compliance program, Michel said.

“If the Department of Justice and the IRS start pursuing Singapore, or Hong Kong,
or go back to the Caribbean, or look at certain Middle Eastern or Latin American countries,
I think you could see the same effect that you saw in Switzerland where an increased
enforcement pressure by the U.S. in a jurisdiction starts to shake the trees in a
pretty big way,” he said. “There’s a direct relationship between the DOJ and IRS deciding
to target a particularly region or a particular country and the amount of compliance
that comes out of the other end.”

Exchange Information

The IRS news release mentioned that FATCA, the network of intergovernmental agreements
between the U.S. and partner jurisdictions, and the DOJ Swiss Bank Program have increased
the automatic exchange of taxpayer information between the U.S. and other countries.

That expanded exchange has increased taxpayer compliance because taxpayers know the
IRS has access to their information, said John L. Harrington, a tax partner at Dentons
US LLP. “The IRS now has possession of offshore financial information that it previously
had to wait months to obtain, if it could obtain the information at all,” he told
Bloomberg BNA in an e-mail Oct. 21.

The expansion of the information exchange network doesn’t come without challenges,
he said, noting that the volume of information coming in is like a “fire hose” of
data.

“The IRS has to find ways to categorize the information so that it can identify which
of the information is relevant from an enforcement standpoint,” Harrington said. “The
larger the information flow, the harder it is to find the relevant nuggets among all
of the false positives and non-US information.”

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